Jul 24, 2012
Executives
Cindy Christopher – Manager of Investor Relations Vincent J. Delie, Jr.
– President & Chief Executive Officer Gary L. Guerrieri – Chief Credit Officer Vincent J.
Calabrese – Chief Financial Officer
Analysts
Damon DelMonte – KBW Frank Schiraldi – Sandler O'Neill Mac Hodgson – SunTrust Robinson Humphrey David Darst – Guggenheim Securities Mike Shafir – Sterne Agee Tom Frick – FBR Capital Markets John Mooren – Macguire Capital
Operator
Good day and welcome to the F.N.B. Corporation’s Second Quarter 2012 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Instructions will be provided at that time. As a reminder, today's conference is being recorded.
And now, I would like to turn the conference over to Cindy Christopher, Manager of Investor Relations for F.N.B. Corporation.
You may begin.
Cindy Christopher
Thank you and good morning everyone. Welcome to our second quarter of 2012 earnings call.
This conference call of F.N.B. Corporation and the reports that are filed with the Securities and Exchange Commission often contain forward-looking statements.
All forward-looking statements involve risks, uncertainties and contingencies that could cause F.N.B. Corporation's actual results to differ materially from historical or projected performance.
Please refer to the forward-looking statement disclosure contained in our second quarter of 2012 earnings release, related presentation materials and in our reports and registrations statements F.N.B. Corporation files with the Securities and Exchange Commission and available on our corporate Website.
F.N.B. Corporation undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after the date of this call.
It is now my pleasure to turn the call over to Mr. Vince Delie, President and Chief Executive Officer.
Vince?
Vincent J. Delie, Jr.
Thank you, Cindy. Good morning everyone.
Welcome to our second quarter earnings call. Joining me today on the call are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
I will be highlighting our second quarter achievements and financial results as well as providing you with details on our recent efficiency initiative. Gary will then discuss our asset quality and Vince will provide a detailed review of our quarter’s operating results and an update on our outlook for the remainder of 2012.
The second quarter was another solid quarter for F.N.B. We delivered strong results with positive trends seen across all key drivers.
Our earnings reflect consistent growth, with strong loan and transaction deposit growth. We continue to effectively manage risks and expenses.
The team remains focused on positioning the company for growth. We finalized plans to accelerate a portion of our ongoing branch optimization program.
We also continue to make excellent progress in the execution of our e-delivery strategy. I will expand on these topics in a moment.
First, let me share operating highlights with you. Beginning of Slide 4, net income on an operating basis was $29.3 million or $0.21 per diluted share, representing a 113 basis points return on average tangible assets.
These results compare favorably to the prior and y ear-ago quarter. Revenue growth, excluding the benefit of accretable yield was also strong at 6% annualized.
The net interest margin was 3.8%, an expansion from the first quarter. Vince will provide details on the margin in his remarks.
The efficiency ratio improved to 58%, as we continue to manage expenses and realized cost savings from the Parkvale acquisition. Our portfolio has expanded through strong organic growth in loans, transaction deposits and customer repurchase agreements.
Total loan growth excluding reductions in the Florida portfolio was 4.4% annualized, largely driven by commercial loan growth in our Pennsylvania portfolio of over 7%. Consumer loan growth was also strong at 8.3% annualized.
We reported a healthy consumer pipeline at the end of last quarter and the benefits are apparent in this quarter’s results. Our ability to deliver quality, consistent loan growth uniquely differentiates F.N.B.
and reflects the talent and depth of our team and the execution of our holistic sales management process. Asset quality results were good, with stability evident in the results of our core portfolios.
We achieved significant exposure reduction in the Florida portfolio, largely reflecting principal payoffs on performing and non-performing credits. Gary will go over these items in more detail with you.
We are very pleased with the quarter’s positive results. Slide 5 provides you with a longer-term perspective of our positive momentum.
These graphs depict our operating return on tangible asset and tangible equity from 2010 through the first six months of 2012. In each period, our returns consistently far exceed peer results with top-quartile performance for ROTE.
In order for us to sustain our industry leading performance, we continuously look to proactively position F.N.B. for greater efficiency and profitability.
One area that received significant focus is our physical delivery channel. Let me provide some background.
In 2010, we formalized the systemic process to evaluate our branch network. This ongoing evaluation has resulted in the number of market expansions, market entries and consolidations.
Since 2010, we have expanded in strategic markets through de novo locations and consolidated a total of 25 locations, when including the 15 Parkvale-related consolidations. Now, at this time, we have chosen to accelerate the process and consolidate 20 additional branches and also reduce service at 3.
Overall, this represents a 7.5% reduction of our current retail branch network of 266 locations. The affected retail branch locations are widely dispersed across our geographic footprint, and we plan to complete this consolidation in the fourth quarter of this year.
Run rate cost savings of $4 million pretax are projected, with the majority realized in 2013. When building an attrition assumptions, the projected pretax benefit to earnings in the $2.5 million to $3 million range.
The decision to consolidate these locations reflect a number of underlying considerations. We look at branch profitability, customer transaction volumes, alternative means to serve our clients such as an enhanced ATM network and proximity to existing branch locations.
In fact, the average distance between these consolidated branch locations is only 4.5 miles. Consideration was also given to shift in consumer preferences and trends to online banking and mobile banking channels.
Our significant investment in leading-edge technology positions F.N.B. to meet these preferences and benefit from these trends.
This branch consolidation plan is one component of positioning F.N.B for future growth. Our efforts will enhance efficiency, contribute to greater profitability, and result in a more effective delivery channel.
Lastly, I would like to take this opportunity to provide an update on our e-delivery investment, which is important to our overall retail delivery strategy. We are pleased that the implementation is on schedule, with positive early-stage results.
Phase 1 is in place with advanced features such as business-to-business and person-to-person payments. Our mobile banking app launch was successful, with 15% of our online customers enrolled since introduction in early June.
Slated for the fourth quarter is Phase 2, which will significantly enhance our online and mobile banking capabilities. Advanced offerings will include mobile remote deposit capture, online total money management tools and mobile alerts.
As you can tell, I am very excited about this initiative and proud of what our team has accomplished. Now, I would like to turn the call over to Gary to discuss asset quality.
Gary L. Guerrieri
Thank you, Vince and good morning everyone. The second quarter was a very positive one from a credit quality standpoint, as several of our key metrics reached levels that we have not seen since 2008.
Our core Pennsylvania and Regency portfolios remained solid, as they have throughout the cycle, while our Florida portfolio was reduced during the quarter to only 1% of the overall portfolio, with principal reductions and payoffs on a few sizable credits seeing the driving force, as lending activity in this market increased during the quarter. If you will direct your attention to Slide 8, I would like to walk you through some of the second quarter highlights, with the focus of my commentary around the company’s originated portfolio.
Delinquency improved to 1.78% at June quarter-end, driven by lower Florida non-accrual levels and was further supported by the stable delinquency in our Pennsylvania portfolio, while Regency’s delinquency reached its lowest level in over a decade. The positive movement in Florida non-accruals also drove the company’s non-performing loans and OREO down by 29 basis points, ending the quarter at 1.93%.
The Pennsylvania portfolio’s OREO level further contributed to the lower overall non-performers, down 2 million during the quarter, after we were able to sell several properties that were acquired from Parkvale. The OREO sell activity drove a 5 basis points linked-quarter improvement in the level of the Pennsylvania portfolios, NPLs and OREO, ending June at a very solid 1.24%.
Net charge-offs of 7.5 million were 45 basis points annualized for the quarter and 38 basis points on a GAAP basis, with the linked-quarter increase reflective of the comparatively low levels that we experienced during the first quarter and $800,000 related to Florida. When measured on a year-to-date basis, exclusive of the impact of Florida, our originated net charge-offs were only 36 basis points, representing a 6 basis points improvement over the similar period a year ago.
The reserve position remained directionally consistent with the quality of the portfolio, ending the quarter at 1.49%. Turning to Florida, our loan portfolio ended the quarter at only $85 million, while the overall portfolio exposure including OREO totaled 104 million.
This 33% linked-quarter exposure reduction resulted from nearly 50 million in principal payments, of which one half was attributable to underperforming loans, bringing NPLs and OREO down to 43 million at the end of June. We have made significant strides in Florida, and with the exposure levels down to where they are today, we will limit future discussions with you to only those events that are significant.
Shifting briefly to the acquired book, this portfolio ended the quarter at 1.1 billion, with contractually past due accounts totaling 57 million. As you will recall, these acquired accounts are all marked to fair value.
In closing, our performance during the second quarter demonstrated stability and an overall positive movement in the direction of our credit portfolio. Our originated metrics have begun to reach levels not seen since before the economic downturn, while our acquired portfolio is performing slightly better than we expected.
With another solid quarter behind us and a considerable portion of the Florida portfolio now resolved, our loan portfolio is well positioned for the future. I would now like to turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Vincent J. Calabrese
Thanks, Gary and good morning everyone. As Vince discussed, second quarter results were solid, delivering $0.21 per share through the continued positive performance from our key drivers.
I will focus my remarks this morning on additional highlights of our operating results and our expectations for the second half of the year. Let’s begin with balance sheet highlights on Slide 10.
As Vince mentioned earlier, the second quarter marks the 12th consecutive quarter of total organic loan growth, with growth of 2.8% annualized. Excluding reductions in the Florida portfolio that Gary discussed, total growth was 4.4% annualized.
Positive results were seen in both commercial and consumer loans. Commercial growth for the Pennsylvania portfolio was strong and primarily the result of market share gains, as our commercial line utilization rates remained stable at historical lows.
Consumer loan growth was also strong at 8.3% annualized and benefited from 6.5% growth in home equity related products. The increase in our average securities portfolio balances primarily reflects the timing of reinvestment activity during the first quarter.
On a period-end basis, securities represent 19% of total assets, which is a normal level for us and we expect to be in this approximate range for the remainder of the year. We also continue to maintain a low duration for the portfolio of 2.7 at quarter-end.
On the funding side, growth for total deposits was 6.3% annualized, with strong growth of 14.3% in relationship-based transaction deposits and customer repo agreements, partially offset by continued managed decline in time deposits, shifting of those balances into non-maturity products. We continue to focus our efforts on growing transaction deposits and customer repos, with these balances supporting our net interest margin and deepening client relationships.
Our cost of funds declined 8 basis points linked quarter. The net interest margin expanded 6 basis points in the quarter to 3.80%.
During the second quarter, we recognized 2.5 million in net accretable yield, which was higher than normal, given the implementation of a new acquired loan accounting system this quarter, for both CB&T and Parkvale, which reflect better than originally estimated cash flows on our acquired portfolios. Excluding this benefit, the margin was approximately 3.70%.
Overall, non-interest income results were positive. Non-interest income increased 3.3% in the second quarter, primarily as a result of seasonally higher service charges on deposit accounts and an increase in other income.
The higher other income reflects increased swap-related revenue from our commercial lending activities. Wealth management revenue was slightly higher and insurance commissions and fees reflect normal seasonal declines associated with contingent fee revenue received in the first quarter.
Turning to non-interest expense on Slide 13, total non-interest expense decreased 9.5%, largely reflecting the merger and severance costs incurred in the first quarter and a benefit of realizing cost savings related to the Parkvale acquisition. Looking at our capital position on Slide 14, regulatory capital levels at June 30th are consistent with the prior quarter-end, and the TCE ratio at quarter-end increased slightly to 6%.
We continue to exceed all regulatory well capitalized thresholds. Turning to Slide 15 and our outlook for the second half of 2012, given our solid results for the first half of this year, our positive expectations for full-year 2012 are essentially unchanged, assuming that we maintain our current economic environment.
We expect to achieve continued solid growth results for loans, transaction deposits and customer repurchase agreements. Given my earlier comments on net interest income, we are still expecting margins to be in the mid-3.60s in the second half of the year, subject to potential upward revision if there are any further changes in expected cash flows related to our acquired loan portfolios.
We look for non-interest income to increase in the mid-teens, as we continue to benefit from our diverse fee income sources. This translates into organic growth in the mid-single digits.
Through the realization of cost savings related to the Parkvale acquisition and our culture of expense control, we expect the full-year efficiency ratio to be in the high 50% area. This is on a run rate basis.
Non-run rate items expected in the last half of the year include costs associated with our branch consolidation plan that Vince reviewed earlier. We project these one-time costs to total $2.5 million pretax in the third quarter of 2012.
As Gary discussed, we are very pleased with our credit quality results through the first half of the year. Looking to the remainder of 2012, we expect overall credit quality to demonstrate continued solid performance and believe that provision will be in the $7 million to $8 million range for the third and fourth quarter, as we support planned loan growth.
On a full-year basis, this range represents about a 12% to 18% improvement over 2011. For taxes, we expect an effective tax rate between 28% and 29% on a GAAP basis for the remainder of 2012.
Now, I would like to turn the call over to Vince for his closing remarks.
Vincent J. Delie, Jr.
Thank you, Vince. We believe that we had a great second quarter with solid financial results.
As you can see from the guidance Vince provided, our expectations for the remainder of the year are positive. Additionally, significant progress was made on several strategic actions during the quarter.
The branch consolidation we have underway is a decision that will generate significant cost savings and improve the efficiency of our organization. Investments such as the investment in the e-delivery channel position us for growth and allow us to react and benefit from changing client preferences.
Looking ahead, we will continue to execute our strategy of proactively reinvesting and repositioning the company to succeed in this ever-revolving environment. This is not a new strategy for us and we will remain centered on balancing the need to position the company for revenue growth, while maintaining disciplined, focused expense control and a low risk profile.
We look forward to sharing updates with you on our progress. And now, I would like to turn the call over to the operator for questions.
Thank you.
Operator
(Operator Instructions) We will take our first question from Damon DelMonte with KBW.
Damon DelMonte – KBW
Hi, good morning guys. How are you?
Vincent J. Delie, Jr.
Good morning, Damon.
Damon DelMonte – KBW
I was just wondering, Vince Calabrese that is, with regards to the margin, so about a 10 basis points point benefit from that $2.5 million. So, our starting point then is 3.70% on a modeling perspective for the third quarter?
J. Calabrese
Damon, I would say that the kind of mid-3.60s is still the guidance that I have with some upside to that number. This is the first quarter that we utilized the new loan accounting system for our acquired loans.
So, the cash flows overall have been better than what we estimated originally for Parkvale and CB&T. So, still kind of guidance to the mid-3.60s, but if any recovery that will come in, that provides some upside to that number.
And we are going to be going though re-estimating the cash flows, which is something we will be doing every quarter. So, there is – I can’t say what precision, because we have to go through that process, but kind of mid-3.60s with some upside depending on how the cash flow has come through to normal processing, plus additional recoveries.
Damon DelMonte – KBW
Okay. So, that mid-3.60s would be the average for the next two quarters then?
Vincent J. Calabrese
Kind of as a baseline and then with some upside with depending on how the cash flow has come in.
Damon DelMonte – KBW
Okay. And are you able to quantify the total impact of the accretable yield on the margin based on the acquisitions?
Vincent J. Calabrese
It’s really the 10 basis points. So, the net accretable yield in total was $2.5 million.
You have premium amortization and you have accretion that are both coming through there. So, the 3.70% is kind of the run rate without the accretable yield.
Damon DelMonte – KBW
Okay. How much was the premium amortization this quarter?
Vincent J. Calabrese
Well, it’s all netted in that $2.5 million, Damon. I don’t have that right down in my fingertips here.
Damon DelMonte – KBW
Got you. Okay.
Great, and then, I guess my other question is with regards to your outlook for loan growth. Any particular areas of your footprint you are seeing better opportunities than elsewhere?
Vincent J. Delie, Jr.
I would say that we spent a lot of time investing in our sales management systems here, hiring good people across the footprint. The growth really has come in a number of markets and we are seeing good success in Youngstown and Johnstown, in State College, Pittsburgh has been a great performer for us.
And narrowing it down into the various segments in the Pittsburgh market, the asset-based lending group has performed very well. Our middle market effort in Pittsburgh has been going very well.
So, really, I would say it’s been across our footprint.
Damon DelMonte – KBW
Okay. That’s helpful, that’s all I had for now.
Thank you very much.
Vincent J. Delie, Jr.
Thanks Damon.
Vincent J. Calabrese
Thanks Damon.
Operator
And we will take our next question from Frank Schiraldi with Sandler O'Neill.
Frank Schiraldi – Sandler O'Neill
Good morning, guys.
Vincent J. Delie, Jr.
Hi Frank.
Vincent J. Calabrese
Good morning.
Frank Schiraldi – Sandler O'Neill
Just had a quick question on loan growth. Wondered if you could talk a little bit about what you are seeing in the marketplace in terms of – the growth you are getting, would you say it’s more taking market share away from others or you are seeing some increased demand in the marketplace?
Vincent J. Delie, Jr.
Right. I would have to characterize our growth as more of a market share grab than seeing increased demand, Frank.
Truthfully, it’s a very difficult climate from a lending perspective and we have not seen large CapEx projects emerge, (inaudible) is still at historic lows, the companies are still positioning their balance sheet to whether uncertainty related to a number of factors. So, I don’t feel that we are in a robust lending environment.
I think given where we are positioned, if you look at the market itself, this market has performed better than the rest of the country. So, we have had some opportunities because of that, but as you look long term, given that, that we have been building our customer base over the last three years, when that activity comes back, we should have a pretty decent run.
So, once we see loan demand pick up and CapEx spending pick up in the markets that we serve, I think we are very well positioned to benefit from that. And I would say it is very competitive out there and has been.
Vincent J. Calabrese
I would also add just a relative market share position. There is still plenty of opportunity across that continue to take market share from others in the marketplace.
Frank Schiraldi – Sandler O'Neill
Right. Okay.
And then, just on sort of 30,000 foot view on M&A. Just wondering if you have seen events that you have heard anymore, maybe chatter in the marketplace in terms of M&A in Pennsylvania, if you could just remind us where sort of geography-wise would be most intriguing to you?
Vincent J. Delie, Jr.
Obviously, we have been expanding in Pennsylvania. So, any opportunity in the Pennsylvania market would be of interest to us.
I believe other markets present opportunities, eastern Ohio, Maryland, many of the states that we border, there are opportunities to expand in those markets. And I would say that, to answer your first question, I kind of went backwards, but your first question was about the chatter in the marketplace and the activity, I definitely envision, I have seen more activities, more chatter in the market, and I think as we continue to move through this cycle with all of the items spacing financial institutions, I think we are going to see an acceleration in the number of opportunities.
And I think that’s starting to begin.
Frank Schiraldi – Sandler O'Neill
Okay. Great, that’s all I have.
Thank you.
Vincent J. Delie, Jr.
Thanks Frank.
Operator
And we will take our next question from Mac Hodgson with SunTrust Robinson Humphrey.
Mac Hodgson – SunTrust Robinson Humphrey
Hi, good morning.
Vincent J. Delie, Jr.
Good morning, Mac
Mac Hodgson – SunTrust Robinson Humphrey
Just a couple of questions, Vince Calabrese, on the net interest margin, just to go back over that again, it was always my understanding that when accretable yield goes up on improved cash flows, you see that benefit over the remaining life of the acquired portfolio. And so, should we expect to see, am not saying, this is what you are saying, but just trying to clarify, should we expect to see that 10 basis points benefit going forward, but it could be less as a result of revaluing the cash flows in the future or am I kind of just misinterpreting the 10 basis points benefit we saw this quarter?
Vincent J. Calabrese
I think there is a couple of things. As you know, this accounting that’s in place is super complex that they put in place, and it doesn’t really I don’t think helps the reader with clarity to what’s happening its underlying portfolio.
But this is the first quarter that we have utilized this new loan system. So, there is, looking at the cash flows estimated for Parkvale and CB&T since we have had them.
So, there is that element going through there. When you have recoveries and impaired loans, Mac, those come in sooner, because the loan is gone, so there is some recognition of income that comes in at the time that goes, recoveries happen.
So, there is a level of recoveries that got captured this quarter. There is no guarantee that’s going to happen as you go forward, but a lot of it is driven by this being the first quarter that we used the system.
So, there is definitely some upside to the kind of base forecast that I am giving you. And I think as we get a couple of more quarters under our belt of using this system, we will have more and more clarity about how it projects out going forward.
Mac Hodgson – SunTrust Robinson Humphrey
Okay. Good, that helps.
And then, question on the branch optimization. Just wanted to go back over to the $4 million of pretax annual cost savings or expected, and then I think Vince, you made a comment about $2.5 million pretax net of attrition, and I just wanted to get like a little more clarity on your assumption on the delta between the $4 million and the $2.5 million?
Vincent J. Delie, Jr.
When we model this, we took into consideration some disruption in the customer base. So, we were modeling a 5% to 10% attrition rate.
And you really have to look at that in tandem with the expense phase. So, that’s how I am netting down to $2.5 million to $3 million.
Vincent J. Calabrese
And one other things I can add, Mac, is we have a very aggressive proactive plan in place to manage these clients and we have gone through a number of these in the past and those programs have been very successful in maintaining our client base, but as Vince indicated, we do build in a margin of attrition, Mac.
Vincent J. Delie, Jr.
And I will add to that, I mean, we actually have, I mentioned in my comments, there is a systemic process that we go through within this organization. So, look at our delivery channel to ensure that we are operating in the most efficient manner.
So, we look at a whole bunch of metrics on each one of those branch locations, transaction, volume, production quality, the whole bunch of metrics, and we are analyzing that delivery channel every quarter. So, we have made some moves in the past to consolidate and we have made some moves to expand in the past, and it’s all about repositioning our delivery channel to take advantage of growth opportunities and operate in the most efficient manner possible.
So, we just decided to accelerate that a bit, given some of the things that are on the horizon.
Vincent J. Calabrese
Mac, I would just add to Gary’s comment – Vince comment, to the average distance between the consolidating branch and receiving branch is 4.5 miles. So, I think that combined with our very proactive approach, very comfortable with that 5% to 10% kind of attrition range that’s baked into the $2.5 million.
Mac Hodgson – SunTrust Robinson Humphrey
Okay, great. That’s all very helpful.
Just one last one, Gary. As it relates to Florida obviously, great progress this quarter on reducing some of the exposure there.
I was curious if we should read anything into that movement this quarter as it relates to just the Florida market in general, are other banks in that market getting more aggressive and obviously taking some of your credits away from you? Is that kind of how the pay downs happen?
Gary L. Guerrieri
Lending activity did increase in the market during the quarter. We have seen it ramp up through the early part of this year, and I think I reported that to your last quarter.
So, that activity does continue to get stronger across that market, Mac, as we just continue to go through the cycle there.
Mac Hodgson – SunTrust Robinson Humphrey
Okay, great. Thanks for the help.
Vincent J. Calabrese
Thanks Mac.
Operator
And we will take our next question from David Darst with Guggenheim Securities.
David Darst – Guggenheim Securities
Good morning.
Vincent J. Delie, Jr.
Good day.
Gary L. Guerrieri
Good morning, David.
David Darst – Guggenheim Securities
Could you give us some incremental data on the residential mortgage portfolio that you have got from Parkvale, just like the average yield type of loan, and what you think the expected duration of that portfolio is? Just trying to get a sense of how fast we might see that portfolio run off?
Vincent J. Calabrese
Yes, I would say, David, I don’t have the yields right here, but the duration of the portfolio definitely under 10 years is what we have modeled for accounting purposes, priced somewhere between 7 and 10.
David Darst – Guggenheim Securities
And so, should we expect a similar level of runoff that we saw this quarter to continue or will you be actually reflecting some of those loans and putting it back on the books?
Vincent J. Calabrese
Probably pretty close to the pace that you have seen this quarter is what I would expect as we go forward. Residential mortgage portfolio, just a reminder, for interest rate risk purposes, we don’t really keep much of the fixed rate.
I mean, we saw that production, so the portfolio that you see, we will just continue to have some runoff. It’s a fixed rate market what people are looking to originate.
So, as things are refinanced and then we saw the loans, I think the decrease that’s in there within a reasonable range of what I would expect the next couple of quarters.
David Darst – Guggenheim Securities
Okay. What’s the average deposits per branch of the group that you are consolidating?
Vincent J. Delie, Jr.
It’s in the $16.5 million range, that’s the average. I mean, these are relatively small in terms of deposit size and loan bookings for that matter.
David Darst – Guggenheim Securities
Okay.
Vincent J. Calabrese
The average loans are under $5 million.
Vincent J. Delie, Jr.
Yes, so it really makes a lot of sense when you look at all of the numbers.
David Darst – Guggenheim Securities
Okay. And Vince, at what do you think you are actually ready to announce or pursue another acquisition?
Vincent J. Delie, Jr.
I think we have stated our acquisition strategy in the past. We obviously will evaluate opportunities.
If they provide accretion within one year, if we can recoup diminution of capital within a 12-to-18 month period, we are in the game. So, I would say as the activity picks up, there should be opportunities to expand.
Gary L. Guerrieri
David, I mean, we could – if there was an attractive opportunity right now, we could pursue that. So, I guess –
David Darst – Guggenheim Securities
You could, okay, got it. That’s my question.
Okay, thanks a lot. Nice quarter.
Vincent J. Delie, Jr.
Thank you, David.
Operator
We will take our next question from Mike Shafir with Sterne Agee. .
Mike Shafir – Sterne Agee
Hi good morning, guys.
Vincent J. Delie, Jr.
Good morning. How are you, Mike?
Mike Shafir – Sterne Agee
Just to kind of go back to the margin for a minute, if we think about the yield on interest-earning assets, it only declined 1 basis point sequentially. I am assuming a lot of that has to do with the addition of the accretable yield.
If we were to be thinking about excluding that, what would that number have gone to in terms of the yield on interest-earning assets?
Vincent J. Calabrese
If you take the $2.5 million, if you just take the $2.5 million out, the impact of the margin overall is 10 basis points. The total earning asset base that we have, and I can come back to you and just do the math on that, Mike.
Mike Shafir – Sterne Agee
Okay. That’s fine.
I guess I am just trying to get an idea of reinvestment yields, specifically on the securities portfolio and kind of how you guys are thinking about that? I know you are keeping it short, but with the tenure declining almost on a daily basis, it just seems like it’s going to be tough to continue to prop that yield up.
Vincent J. Calabrese
Yes, I can answer that one, and you are right. When we look at our securities portfolio, I think as I mentioned, the duration is still short, 2.7.
But when we look at what’s cash flowing off the portfolio, we continue to have about $50 million a month, this cash flowing. That’s coming off at 2.25, and where we are investing right now at 1.40.
So, there is an 85 basis points difference in that cash flow of that $50 million that’s occurring each month, given where rates are. We continue just to buy plain vanilla securities, we are not stretching on structure at all.
1.40 is what’s there right now, but I would comment though on going the other way, because we continue to have significant amount of CD maturities that are helping to offset that. I mean, next couple of quarters, we have between 400 million to 450 million of CDs that are maturing, we are picking up 55 to 75 basis points on that on average.
So, that’s obviously helping the margin as well as continue to have – the loan growth, it’s coming with demand deposit growth and repo balances also supports the margin. There’s lots of moving parts.
Vincent J. Delie, Jr.
We have had some terrific commercial demand deposit growth, which has helped the overall margins. So, that’s been a huge benefactor for the company.
Mike Shafir – Sterne Agee
Okay. So, as we think about the cost of funds now at 69 basis points, I mean, that’s pretty low.
I guess how much more do you think that could decline over the next several quarters, if you think about – when you said 400 million to 450 million in CDs, is that over the next six months or is that over Q3, and then Q4 an addition 400 million?
Vincent J. Calabrese
It’s 400 million to 450 million per quarter. Like I said, we are picking up 55 to 75 basis points on that.
So, there is still some room there, and then there’s the demand deposits, obviously significant growth that we have had there helps tremendously to support the margin. So, there is still room in our overall cost of funds, and people have been shifting from CDs into savings and money market.
And as you know, those rates are lower. So, there is still room there, and it’s all baked into the guidance that I provided.
I mean, my base of mid-3.60s incorporates what we expect to happen there and then kind of the upside on the acquired loan accounting.
Mike Shafir – Sterne Agee
Okay, thanks a lot guys. I appreciate all that help.
Vincent J. Calabrese
Thank you.
Operator
We’ll take our next question from Bob Ramsey with FBR.
Tom Frick – FBR Capital Markets
Hi good morning guys. This is Tom Frick for Bob.
Just a question on page 2 of your e-delivery strategy, scuttled for 4Q’12. What is the added cost of this initiative and will it offset a portion of the 4 million in branch consolidation savings?
Vincent J. Calabrese
You know the cost of this initiative is already baked into our guidance with year and if we just close that in an earlier quarter, so I don’t know if you want to give him some information?
Gary L. Guerrieri
Yeah, now I can restate what that is. I mean the total investment is approximately $4 million pre-taxed, a lot of that capitalized and the expense increase is taken to our guidance for this year’s million and a half.
And that’s again is to Vincent’s point. That’s already baked into our guidance.
Tom Frick – FBR Capital Markets
Okay, got you. Thank you.
Gary L. Guerrieri
There’s a branch optimization project is a new announcement.
Vincent J. Calabrese
Yeah that’s right. That’s additive.
Tom Frick – FBR Capital Markets
And then last quarter you guys reported a healthy consumer pipeline translating into a pretty strong growth this quarter. You know how are your consumer, and for that matter commercial pipelines heading into the third quarter?
Vincent J. Calabrese
I mean, our pipelines, when you look at our pipelines we look at it two ways, we look at a short term 90-day up to 90-day pipeline in each one of those business units. Then we look longer term at the total pipeline and our short pipeline looks fairly healthy.
So, as we move into the third quarter we have a pretty decent pipeline.
Gary L. Guerrieri
And a consumer pipeline is stoppable to where we were at the end of March.
Vincent J. Calabrese
Yes, absolutely.
Tom Frick – FBR Capital Markets
Okay, great thanks. That’s all I had.
Vincent J. Calabrese
Thank you.
Operator
And we’ll take our next question from John Mooren with Macguire Capital.
John Mooren - Macguire Capital
Hey guys, thanks. Most of mine have been answered at this point.
But just kind of circling back on funding cost and maybe additional leverage that you guys can pull there. I think there is like 200 million or so of trumps out, obviously those are kind of going away for everybody, recognising of course that if its still cheap to your two capital.
Are there higher cost coupon trumps that you guys could look to, to just do away with it?
Vincent J. Calabrese
Yes, there is. We look to that on a regular basis John.
I mean, there is several tranches to our trumps that we have. There is one tranche that’s on a small side that’s a fix rated, it has got like a 10% rate on it.
And it’s something that we model it and you know, its dilutive to get rid of it right now, it is so cheap capital and with us being one of the grandfather companies, whilst no longer fully grandfather, puts you in the 10-year cycle. So, there is just a long period of time to replace that, and I would expect overtime, particularly that one tranche that we would replace it.
It’s pretty small, I want to say it by $16 million, the rest of that 200 is really very nicely priced right now, its floating at (inaudible) pretty good spread, so. But overtime as everybody else is looking at it, potentially looking at the preferred market as the way to replace some of this overtime and you all will be looking at that too.
Right now there is no immediate opportunity or need to do something quickly given the overall time frame.
John Mooren - Macguire Capital
Okay, thanks and then just a few things if happen to have kind of point to point what the duration of securities book was, to get quarter end you mentioned it was 2.7, what was it at the end of the first quarter?
Vincent J. Calabrese
2.4.
John Mooren - Macguire Capital
Okay. So, lengthened out, just a touch, was there, I don’t if could elaborate on that a little bit where you guys redeployed this quarter, it mean to sound like it was at 140 basis points, it couldn’t have been exotic, but?
Vincent J. Calabrese
Yes, induration on the money we are reinvesting is 3 to 3.5 so, while we have gone up from 24 to 27 but we’re not going to go out on the curve at all, I mean it’s just not worth it. But we’ve just gone out a tick.
John Mooren - Macguire Capital
Sure, understood, thanks very much.
Operator
And we’ll take our next question from Mac Hodgson with SunTrust Robinson Humphrey.
Vincent J. Calabrese
Hey Mac.
Mac Hodgson - SunTrust Robinson Humphrey
(inaudible) touched on that too, so am good, thanks.
Vincent J. Calabrese
Thanks.
Operator
And at this time there are no other questions in queue.
Vincent J. Calabrese
Thank you everybody. Thank you for joining the call and look forward to meeting again next quarter.
Operator
That concludes today’s conference call, we appreciate your participation.